Question

3. Operating cash flow is often referred to as the lifeblood of a firm. The vaccine makers received cash up-front from the government for the stockpiled vaccines. Such cash would be reported to stakeholders (financial analysts, stockholders, lenders, etc.) in the operating cash flow section of the Statement of Cash Flows in the fiscal period of receipt. Given this, why would these pharmaceutical companies be so concerned about when the revenue related to this cash is recognized for income statement purposes? In your response, consider how recognized revenues are used by firm stakeholders.

Answer 1

Pharmaceutical companies are concerned about when revenue related to up-front cash is recognized for income statement purposes because recognized revenues impact financial performance and stakeholders' perception of the company's financial health and profitability.

Step-by-step explanation:

The pharmaceutical companies would be concerned about when the revenue related to the cash received up-front is recognized for income statement purposes because recognized revenues impact the financial performance of the company and can influence the perception of stakeholders. When revenue is recognized, it indicates that the company has earned income from its core operations, which is an important indicator of a company's financial health and profitability.

Timely recognition of revenue is crucial in assessing a company's ability to generate future cash flows, make investments, and repay obligations. For instance, if the revenue is recognized in a specific fiscal period, stakeholders can evaluate the company's operating cash flow and assess its ability to cover expenses, reinvest in the business, or distribute dividends to shareholders.

Furthermore, stakeholders, such as financial analysts or stockholders, rely on the income statement to understand a company's financial performance and make decisions regarding buying or selling the company's stock. If revenue recognition is delayed, it can affect the accuracy of financial analysis and can create uncertainties that impact stakeholders' perception of the company's financial position.

Answer 2

Step-by-step explanation:

Advanced cash payment is treated as liabilities in the financial statements until they are earned.

The accrual method of accounting states that income are recorded when they are earned and expenses recorded when incurred.

In furtherance to this , income are earned when the risks and rewards are transferred to the seller.

This means that until the revenue for this advanced payment is earned , it can not be recorded as a sales revenue in the books of the Vaccine makers , and the profit for the period will be affected , even though it was a boost to the cash flow.

B) Recognized revenue depicts the sales turnover of a company which in turn tells a stakeholder how well a business is doing ,even though it not a sole measure of performance. We need to know that most stake holders may not have a good understanding of other measures of financial performance , however , majority understand sales figure.

It gives the stake holder an insight to the profitability of the business in a period.